Wall St. Titans Gain ETF Foothold

J.P. Morgan and Goldman Sachs have been quickly growing their footprints in the smart-beta space. 

J.P. Morgan and Goldman Sachs might not be the first names that come to mind when you think of a major ETF issuer. But these well-established Wall Street giants known for their active-centric, research-driven asset management businesses are making significant inroads into the ETF space in a very short time.

In the past 24 years since the first ETF came to market, this has been an industry dominated by three large issuers—iShares, Vanguard and State Street Global Advisors. Together, these firms manage more than 80% of all U.S.-listed ETF assets.

Their leadership goes uncontested. But that doesn’t mean firms jumping into the ETF pool like J.P. Morgan and Goldman Sachs are fading into the background. Quite the contrary. Working hard to have distinctive, and well-thought-out lineups of ETFs, these new-to-the-space issuers are quickly growing into major ETF players.

Neck-And-Neck In ETF Assets

J.P. Morgan has 15 exchange-traded products commanding more than $5.7 billion in total assets. Goldman Sachs has 13 ETFs with a combined $5.87 billion. With three exceptions—the J.P. Morgan Alerian MLP Index ETN (AMJ), which came to market in 2009, and a pair of Goldman ETNs brought to market in 2007—all of these funds have been in the market less than three years; many are barely two yet.

Both J.P. Morgan and Goldman Sachs have in common a desire to go where the client is, leveraging their in-house investment research capabilities to create ETFs. Both say that demand from their investors for tools such as ETFs is the driving force behind their efforts.

They also share a focus on smart-beta ETF ideas. These issuers aren’t battling for a piece of the S&P 500 market-cap-weighted pie, but they are offering unique takes on the market.

J.P. Morgan

One of the hallmarks of J.P. Morgan’s approach is its focus on risk weighting and factors.

Many of its ETFs are built to avoid risks you’re not compensated for, such as sector and regional tilts, and to “lean into” risks that deliver returns, such as factors. It’s a multilayered, multifactor approach that lends itself to a lower volatility profile while avoiding the cyclicality of a single factor, according to Jillian DelSignore, head of J.P. Morgan’s ETF distribution. 

Consider the J.P. Morgan Diversified Return International Equity ETF (JPIN), J.P. Morgan’s biggest ETF, with just over $1 billion in assets. The popularity of the fund in a way speaks to the firm’s risk- and factor- focused methodology.

Investors are embracing the idea of a smoother ride in often-more-volatile international markets. The iShares MSCI EAFE ETF (EFA), for example, has a beta of 1.03, while JPIN has a beta of 0.89, according to FactSet data. Beta is the measure of a security's risk relative to the broader market. 

JPIN doesn’t necessarily set out to replace core exposures such as EFA, and many investors are using it to complement it, or to complement what active managers offer, DelSignore says. But she notes that the fund’s reach could expand into the core. 

“We look at building out our ETF suite the way an advisor would think about building out a portfolio—equity, fixed income, alternatives,” DelSignore said.

Put simply, J.P. Morgan’s ETF lineup is built on an alternative-beta foundation.

Funds like the JPMorgan Diversified Alternatives ETF (JPHF), an ETF that’s been dubbed the “hedge fund killer,” navigates that risk premia from alternative exposures that sit somewhere between hedge fund replication on one side and a multimanager approach on the other. These aren’t your vanilla types of portfolios; rather, they’re strategies that—until recently—were hard for many investors to access.

The lineup of J.P. Morgan’s ETFs comes with an average expense ratio of 0.48%, the cheapest costing 0.18%, or $18 per $10,000 invested.

Goldman Sachs

Goldman Sachs has found similar success. Bringing to market 11 ETFs since 2015, the firm is nearing the $6 billion-in-ETF-assets mark. (It also has a pair of ETNs launched in 2007 that are not part of the firm’s current ETF efforts.)

To Goldman Sachs, it made most sense to build the ETF business internally, tapping into the skill set it already had as a $1 trillion money manager. The idea was to deliver to its clients strategies they already knew and “wanted to consume” in the cost-efficient ETF wrapper.

According to Steve Sachs, head of the firm’s capital markets, from the get-go, Goldman set out to accomplish two key things.

First, to focus on what the firm is good at: quantitative security selection. Goldman never wanted to become the sponsor behind a list of hundreds of ETF tickers dabbing into every niche possible.

“When you think about active beta, out first ETF suite, those are strategies that existed inside the firm for a number of years,” Sachs said. “We had $10-billion-plus in assets in institutional separate accounts to varying degrees in those strategies. And we had several institutional clients come to us and say, ‘Look, we like this, we can certainly do a separate account, but we're actually using ETFs more and more.’”

Cost-Leader Goal

Secondly, the firm wanted to make these ETFs cheap. That’s a luxury it had, quite frankly, because it is Goldman Sachs, a trillion-dollar asset manager. The cheapest ETF costs only 0.09%, and the entire lineup of funds has an average expense ratio of 0.38%.

“ETFs are cheaper; but smart beta is not as cheap as pure passive. We just didn't want to have both conversations,” he said. “We wanted to talk about the strategies and why they're superior. We didn't want to have to try to justify the cost. So we decided we’re going to take price off the table.”

The approach quickly gave Goldman a reputation as the low-cost, smart-beta ETF provider.

According to the firm, ETF asset growth has been driven by new investors and has not come at the expense of other vehicles within the firm.

“You don't build a house with just a hammer; you use all the tools in the tool box,” Sachs said. “It's just that we—given how early we are in this process and given the nature of our active funds—aren’t seeing cannibalization of our existing fund lineup. Will we? Probably. It's natural. But we're OK with that.”

The asset-flows shift from active funds into ETFs should come as investors look for cheaper alternatives to active management.

Consider that the Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (GSLC), Goldman’s flagship active beta product, with $2.4 billion in assets, costs 0.09%, the same cost as the world’s largest ETF, the SPDR S&P 500 ETF Trust (SPY). That’s $9 per $10,000 invested. According to Sachs, if you were allocating to a U.S. large-cap growth or value active manager or active fund, you're probably paying 0.75% for that—more than eight times as much.

Charts courtesy of StockCharts.com

No Easy Hill To Climb

While Goldman Sachs’ initial ETF efforts are working out well, there have been some challenges. Most notably, finding traction on the Goldman Sachs Hedge Industry VIP ETF (GVIP)—a fund that owns the top long-equity positions of hedge fund managers. The methodology is based on intellectual property Goldman has had in-house for a decade. That IP has long been adopted by institutions in the synthetic world through things like structured notes and swaps.

In an ETF wrapper, however, the idea has struggled to find a following, raking in only some $45 million in almost a year.

“The ETF structure works very well for that, very tax efficient, and it's outperformed on every metric. Performance has been stellar,” Sachs said. “But asset raise has been slow. It's one of those things: ‘How do I allocate to it?’”

And that’s a challenge that impacts newcomer issuers, particularly smart-beta ETF providers—explaining how their funds work and where they belong in a portfolio. Walking would-be investors through what can often be complex, thorny due diligence processes is a task that impacts every issuer in this industry.

Even household names such as J.P. Morgan and Goldman Sachs have to allocate time and resources to the well-known hurdle of investor education. But that makes their almost-instant success a much more powerful testament to the growing demand for smart-beta ETFs, and for the overall outlook of the ETF industry.

Contact Cinthia Murphy at [email protected]